Bernanke’s structuralist concession: Fed chief quietly downgrades U.S. economic potential

November 29, 2012


For the first time, Federal Reserve Chairman Ben Bernanke has given credence to the idea that America’s long-term economic potential may have been permanently scarred by the turmoil of recent years. In a speech to the Economic Club of New York, Bernanke said:

 The accumulating evidence does appear consistent with the financial crisis and the associated recession having reduced the potential growth rate of our economy somewhat during the past few years. In particular, slower growth of potential output would help explain why the unemployment rate has declined in the face of the relatively modest output gains we have seen during the recovery.

True, Bernanke came nowhere near saying monetary policy was impotent to improve the situation. Indeed, he argued that the weaker potential growth “seems at best a partial explanation of the disappointing pace of the economic recovery.”

Dana Saporta, director of U.S. economics at Credit Suisse, says the implications for quantitative easing are unchanged.

Bernanke’s speech suggested the Fed is not about to stop – much less reverse – its accommodative efforts anytime soon.

Still, it was a momentous occasion, noted Stephen Stanley, chief economist of Pierpont Securities:

Chairman Bernanke makes quite an admission.  He acknowledges that the potential growth rate of the economy has probably been reduced since the crisis, i.e. that a portion of the shortfall in growth and slack in the labor market is structural. This is quite a departure from the guy who gave a 15-page speech to the National Association of Business Economists on March 26 of this year adamantly arguing that the high unemployment rate and slack in the labor market was entirely cyclical and not a bit structural, as a number of others on the FOMC had been arguing.

Of course, lest you think that this is a major about-face, Bernanke quickly reverts to form, suggesting that only a small part of the disappointing growth can be attributed to this (the rest of the shortfall is a garden-variety shortfall in demand). He points out that the FOMC as of September still thinks that the full employment unemployment rate is in a range from 5.2% to 6.0% (the middle of the FOMC’s projected range is a mere 0.2 percentage points higher than it was 18 months ago). This is an interesting hedge, and I am curious to see where he goes with this in the months ahead. It strikes me as a camel’s nose under the tent.  In a few years, we will probably be treated to ‘as I always said, the crisis led to a big structural shift in the economy.’

The question remains: if there has been a downward shift in the economy’s growth potential (from say, 3 percent to around 2 percent), did it take place because of the severity of the crisis or because the collective response of fiscal and monetary policy was too meek?

Note to self: save that one for the next press conference.


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Reuters article: “In a few years, we will probably be treated to ‘as I always said, the crisis led to a big structural shift in the economy.” Did the financial crisis lead to a structural shift in the economy or was the structural shift on-going and did the extra economic activity associated with the over-building of houses in last decade just temporarily hide the fact that the economy had down-shifted? There is some evidence like the steady increase in the number of people receiving food stamps over the past decade that suggests a long, steady deteroration in the economy.

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